Quick Facts

Cyprus has been emerging from a severe economic recession compounded by the collapse of its financial system in 2013. Economic policy has focused mainly on the fiscal discipline, structural reforms, and privatization required by the bailout program. Following the banking sector’s recovery, Cyprus lifted all capital controls in April 2015.

The overall regulatory framework is conducive to foreign direct investment and entrepreneurship. Most aspects of the economy are free from state interference, and the judicial system ensures the protection of property rights. In 2015, the parliament finally passed five insolvency laws and lifted its postponement of the foreclosure law’s implementation.

Background

A U.N. buffer zone has separated the Greek Cypriot Republic of Cyprus from the Turkish Republic of Northern Cyprus since 1974. The Republic of Cyprus joined the European Union in 2004 and acts as the island’s internationally recognized administration. Despite deep mutual hostility, Greek and Turkish leaders continue to negotiate on possible reunification through U.N.-brokered talks. Center-right Cyprus President Nicos Anastasiades took office in February 2013. After the banking sector’s collapse in 2013, Cyprus received a €10 billion bailout from the EU on condition that it agree to draconian measures such as taxing bank deposits. The economy, though it remains weak, registered quarterly growth in the first quarter of 2015 for the first time since 2011. The unemployment rate is one of Europe’s highest.

Corruption is generally not a major problem, but there is evidence that the banking system has served as a tax haven and has permitted the laundering of illegally obtained money from Russia and other countries. Corruption, patronage, and a lack of transparency continue to flourish in the Turkish-controlled area. The independent judiciary in the Republic of Cyprus operates according to the British tradition, upholding due process.

The top personal income tax rate is 35 percent, and the top corporate tax rate is 12.5 percent. Other taxes include a value-added tax and a real estate tax. The overall tax burden equals 31.8 percent of total domestic income. Government spending amounts to 41.9 percent of total domestic output. Public debt still exceeds the size of the economy, but budget deficits have been reduced over the past five years.

The overall freedom to start, operate, or close a business is relatively well maintained within the regulatory framework. Relatively flexible labor regulations facilitate employment and productivity growth, although union power is quite strong. In 2015, the government imposed across-the-board price reductions on all medicines and continued subsidies for the national airline and renewable energy producers.

EU members have a 1 percent average tariff rate. Trade agreements are currently being negotiated with countries that include the United States and Japan. Investment in several sectors is restricted. The financial system has experienced strains and uncertainty. Banks are heavily exposed to Greek debt and have suffered from the sharp downturn in the housing market, and the number of non-performing loans has risen.